Refinancing drop seen plunging mortgage originations

As mortgage rates rise in coming years, refinancing applications will drop, plunging originations of home loans, according to an industry forecast released Tuesday.

By the end of this year, overall mortgage originations will hit $1.75 trillion, a 15% drop from 2012’s level, according to the Mortgage Bankers Association. The decline from 2012 will steepen to 42% by 2014.

Behind those sinking originations is a steady rush downward from borrowers looking to refinance. MBA expects that refinance originations this year will hit $1.08 trillion, 26% lower than in 2012, a gap that will widen to 68% by 2014.

Mortgage rates have trended higher since early May on market speculation about the Federal Reserve tapering its asset-purchase program. That hasn’t happened yet, but officials will start pulling back on the program that has kept long-term rates low once they think the economy is healthy enough.

Tuesday marks the first day of a two-day Fed meeting, and watchers expect officials to maintain the current asset-purchase pace of $85 billion per month. MBA forecasts that tapering will start early next year.

The average rate on a 30-year fixed-rate mortgage recently hit about 4.13%, up from 3.35% in early May. Rates could rise above 5% next year and reach 5.3% in 2015, cutting the pool of homeowners who would want to refinance, according to MBA.

Meanwhile, as the economy strengthens and home prices rise, MBA expects mortgage originations to purchase a home will reach $661 billion this year, up 13% from last year. For 2014, MBA expects purchase originations to hit $723 billion, up 23% from 2012.

The drop in mortgage originations already has banks at work on transitioning to a model that relies more on revenue from purchase loans than refinancing. Indeed, the country’s largest mortgage banks recently reported that originations dropped in the third quarter as rising interest rates took a toll.